Friday, December 02, 2011

Some contrary indicators

CNBC carried a report on hedge funds reducing their exposure to stocks . Given that hedge funds are supposedly managed by some of the best and brightest investors around, it's tempting to adopt the view that if these people are reducing exposure to equities (by around one third according to the report), maybe the rest of us should follow. I prefer to look at it as another contrary indicator - if so many people (including professionals) are underweight equities, maybe it is time to increase exposure? Of course, it would be much nicer if I'd been underweight during this year's bear market but that's another story....

I also received an interesting report on emerging market equities issues by one of the bulge bracket houses (which I can't link to for copyright reasons). Among the data points used to make a case for over weighting emerging market equities was the correlation between net fund outflows and market troughs. Over the last few months, net fund outflows from emerging markets have reached very elevated levels. If history repeats itself, this bodes well for median term equity performance.

Lastly, amid all the doom and gloom about falling property prices in the PRC its also worth noting that the volume and aggregate value of new home sales have held up well - indicating that while developers will be experiencing some pain (possibly a lot of pain), at least there should be plenty of cash coming in to cushion the downside for the developers and the banks which finance their developments. It's still not an attractive situation but, so long as they can keep shifting their inventory, the wider effects of the fall in prices may not be as bad as many fear.

I'm starting to sound like a permabull....which is not a good thing.

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